LONDON — An 18 month investigation to find a way of addressing the 40% discount between Naspers’s share price and the value of tis underlying assets reached a headline making conclusion today. The Group will hive off its global assets, including the $134bn stake in Tencent, into a new company that will be listed in Amsterdam. The new listing, to be done in the second half of this year, will create the third largest stock by value on Euronext and is set to attract $2bn in fresh investment via global index funds. The deal required approval by the South African Reserve Bank and will generate a R1bn windfall for the country in share transfer tax. In between engagements with investors and the international media (the deal made the front page of the Wall Street Journal and received blanket coverage in the Netherlands), Naspers CEO Bob van Dijk found time to take us through the rationale, explaining why he believes it will unlock masses of trapped value in a stock that has a 25% weighting the South Africa’s SWIX index. – Alec Hogg
Hi Alec, how are you?
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Hi, Bob. Great. Thanks for finding some time for me. I know it’s a pretty busy press day. Nice to see you on The Wall Street Journal on their front page.
Yeah, I know. We did get a lot of interest today but I’m always happy to make some time for you.
On December 12, 2017 when you had that Investor Day in New York… I just want to try to work out how you got to today’s big announcement. Did it start there?
Well, it comes to the discount and the general desire for us to create shareholder value. We’d seen that the discount had widened over time. There are a few reasons why, instead of business doing exceptionally well, we’ve had a discount widening issue and we wanted to make sure that we find structural solutions for what is a structural problem. I think we’ve been working on this for about 18 months since we’ve seen that development go and we started to understand what drives it.
Did you get this kind of feedback from your shareholders that they wanted to have the international assets listed outside of South Africa?
There are two components to my answer. The first one is that we see it as our obligation to create long-term value and the main thing for us to do is that we build and invest in high-value/high-global assets and we execute well. Those are the main things we do and I would say that a lot of time and energy goes into that but we also realised there were some structural issues that in spite of us executing well, were not helping us. Then we started thinking about what a broad set of options are that needed to be addressed. We suggested many things at many times but we looked at things that we thought would actually make a real difference to address some of the underlying market dynamics and that’s where the idea was born. It’s a fairly complex thing to do and we also wanted to make sure that we do it in the right way and don’t create additional complexity. Don’t create additional costs and make it sensible, so we spent a fair amount of time on that.
It is quite an obvious thing to do with hindsight. Why the timing now? Is it the complexity that took a long time to execute?
I mean, there are some meaningful considerations around execution, around corporate governance because you don’t want to now have completely different management structures, different boards, a lot of costs and complexity. You don’t want to create unnecessary tax burdens for yourself. If you look through all of those components, it looks fairly obvious but there’s a lot of things that play into it and so again, we don’t run the business for the short-term. When we make a move like this, we also want to make sure that it’s done properly.
Did you need to get permission from anyone in South Africa?
Yes, we needed permission from the South African Reserve Bank, which we have gotten and we needed permission from the JSE, which we’ve also gotten.
Does it require taxes being paid to the South African state?
Yeah, it will result in a significant tax payment, Share Transfer Tax. The exact number we’re still finalising but there will be a tax cost to this that will flow to South Africa.
Significant? Tens of millions? Hundreds of millions? Dollars?
No, it is I think in the order of $70m, I believe but again, I think that’s still being finalised so it might be different.
But it is significant from that perspective, so South Africa wins. What about the South African shareholders? From the way I understand it, there’s going to be an unbundling of 25% of the shares in the new entity, which presumably, a lot of those shares will be held by South Africans. Would they then have to trade through a secondary listing on the JSE?
Yeah, there’s not quite an unbundling, Alec. What it is, we’re taking out international assets and we’re giving them this primary listing on the Euronext exchange and then what we do is what we call a capitalisation Issue, so we basically give people the opportunity to receive shares in this new business. People will either…the non-South African shareholders can take the Euronext listed shares. Some of the South African shareholders will have to take the inward listing of the Euronext listed shares because of their situation but it’s not technically an unbundling. It’s a capitalisation of the new company to our current shareholders.
Thanks for clarifying that. As far as the institutional investors are concerned: in your announcement, you said that some of them because of Naspers’ substantial weighting in the South African indices have been forced to trim their shareholding but this is one way of addressing that. Can you unpack that for us?
Yeah, of course. I think if you go back five years, Naspers was 5% of the JSE’s fixed index in terms of our total weight and if you look today, that is closer to 25%. I think it’s 20 or 24%, which is a massive increase and it makes a lot of shareholders very happy because they had great returns on the back of that. But what has also happened, is that many institutional investors have limits on the amount of capital they can put in one single stock. Typically, the maximum limits are between 10 and 15% and with us being at 25%; as we outperform the index those shareholders would have had to sell shares in the group. A lot of adjustment has happened so what we’re doing now is we’re easing that pressure further and at the same time, it’s maybe at least as important. We’re also opening up the assets of the group to other investors e.g. to index funds in global tech, in Europe etc.
That will be very substantial. Also, active investors in the tech space and the other parts of the investment world. We’re relieving a good chunk of that index concentration issue but at least as important, we’re attracting different bulls of capital to the assets and we think the combination of the two will be beneficial over time.
So, what will Naspers’ stake or weighting in the index be after this transaction?
Yeah, it will probably (roughly) go down by a quarter, so we go from close to 25% to somewhere in the high teens. That’s our expectation. It would fluctuate and the markets are not always easy to predict.
But that’s still very significant about one-fifth of all South Africans’ equity holdings in their retirement portfolio is looked after by you. It’s quite a responsibility.
Indeed. If we’re still in the 18% range, it’s still very meaningful.
Going back to December 2017, when you had that inaugural Investor’s Day in New York: at the time, Naspers traded at a 40% discount to its underlying assets. Where are you now and after this listing in Amsterdam, where are you expecting that things will settle down to?
So, I think that after our Investor Day, things started getting worse. From 40%, I think we went up to 45%. Now, we are back at around the 40-mark but it fluctuates from week to week. I think what is important to mention is that the things that have caused the issue and our size on the index has gotten worse as well as capital outflows from South Africa have been more rather than less over time. I think the fact that it hasn’t gotten worse is thanks to a number of things that we’ve been doing. We think this is structurally helpful and goes to the core of the issue. It will probably take some time before this will impact and it’s hard to predict exactly how it will pan out but the structural factors are very positive and we are quite confident that it will help.
So, from the capital outflow point of view if for instance, you’re a New York Fund…you’ve been invested in Naspers through the JSE. You decided to move out of South Africa. Now, you have the option in future of remaining invested in Naspers’ global assets by going through Euronext.
Correct.
Is that significant enough to be a major factor in all of this?
Yeah, I wouldn’t say it’s just the investors. There have been investors in the past that, based on what we understand of the investor landscape, there are very significant pools of capital that would not consider a South African listing of a more mixed-asset to a very clear global consumer internet group that is listed on European Exchange.
Bob, what is the demand – potentially – from index funds that would now want to be investing or need to be investing in Newco (or the Naspers Global Assets)?
Yeah, it’s hard to put a precise number on it but we expect it to be at least $2bn in passive amounts.
Which again, would have an impact the discount.
It is pure additional demand, so that should be helpful.
You did say that you have been investing significantly in South Africa. Outline some of that for us.
Yeah, if we look at the last three years we’ve invested about R8bn in our different internet businesses. You know some of the names. It’s Takealot. It’s AutoTrader. The businesses that are well known for food. We have our Superbalist business, so we’ve been building those businesses out organically and, in most cases, we’ve been investing quite a lot of money in it. We’ve also said that in the next three years, we will be investing another R3.2bn into our existing businesses and then we’ve also established something that’s called Naspers Foundry, which we started speaking about in October, which is basically a commitment of R1.4bn to young technology start-ups in South Africa that we think can be attractive businesses over time. So, there are quite a lot of things we’re excited about. I was talking today and I think if you look at how Smartphone usage has grown and data costs are coming down – maybe too slowly – but they are coming down. I think there will be more opportunity rather than less in South Africa, going forward.
And the reaction so far in those discussions with shareholders?
So far, very positive. I think that what we also realise is that it’s a fairly technical transaction and it’s important to explain to people what the mechanics are. But where they get really excited, is the fact that this is now a truly global 100% online consumer internet company that’s being listed. It’s the largest of its kind listed in Europe actually, by an order of magnitude. We’re now free to trade unencumbered by its size on any index and also attract a global pool of investors so I think all those things show up as quite positive.
Is there a directly comparable competitor from an investor’s point of view? Who will you be measured against?
The businesses we run and the investments we have are quite unique. They are geographically very well-spread with the focus on growth markets and we are very schematic about what we invest in. We like big segments that address big consumer needs and I don’t think there’s any direct equivalent of what we do. I think our visibility will go up quite a bit with this listing.
How does it work? How does a big announcement like this affect you?
So, we obviously have started talking to our investors. We had an investor call. There was a discussion with analysts before and we’ve spent a fair amount of press interest in different parts of the world from the global publications. Obviously, the Netherlands is very interested because it’s a major listing for their exchange. It would probably be the third largest fund on the Euronext Amsterdam. So yeah, there’s been a fair amount of interest.
